It hasn’t been a great summer for the issue of vicarious liability in franchising. In particular, the Office of General Counsel of the NLRB, in its McDonald’s recommendation, has demonstrated that it is hostile to the franchising model of business. So many of us were rightly concerned about how the California Supreme Court would rule in Patterson v. Domino’s Pizza, LLC. [PDF].
The facts of the case are terribly unfortunate. Taylor Patterson obtained a job at a local Domino’s franchise in Southern California owned by a company called Sui Juris, LLC. Ms. Patterson alleged that a shift manager sexually harassed her whenever she and he shared the same shift. We can all agree that the alleged conduct was outrageous. Ms. Patterson claimed that the manager made lewd comments, and grabbed her breasts and buttocks. When the manager refused to stop, Ms. Patterson reported the conduct to the owner of Sui Juris and her father. She stayed away from work for one week. When she returned, she perceived that her hours had been cut in retaliation for reporting the harassment.
Patterson’s father called a 1-800 customer complaint line set up by Domino’s and reported what had happened to his daughter. In this manner, one of the key factual issues in the case developed. As a result of that call, the information was passed to a Domino’s “area leader” for over 100 franchisees in Southern California. In discussing what had happened to Patterson with the franchise owner, the area leader allegedly told the owner, “You’ve got [to] get rid of this guy.” Importantly, the franchise owner testified that he saw no specific implication in the remarks of his area leader nor did he ask what would happen if he didn’t fire the manager. Ultimately, the manager stopped showing up for work, resolving the issue in the mind of the owner.
Nonetheless, the area leader’s statement became a significant issue in the case after Ms. Patterson sued, naming not just the franchisee but the franchisor as well. Domino’s sought summary judgment, stating that it was not an employer or principal of the manager, and that it could not be held vicariously liable as a result. The trial court agreed, but then the Court of Appeal reversed, holding that there was a triable issue of fact as to whether Domino’s was an employer or principal for vicarious liability purposes. The Court of Appeal seemed to give particular weight to the “get rid of this guy” statements of the area leader, along with the franchisee’s testimony that he followed her instructions.
The Supreme Court, after a careful and nuanced review of the franchising business model and vicarious liability law involving franchise systems, concluded that the trial court had been correct; Domino’s was not the employer or principal of the manager who committed the harassment of Ms. Patterson. The Court focused on the means and manner test: an agency relationship exists only where the principal dictates, not just the desired result of the enterprise, but also the manner and means by which the result is achieved. The Court held that a comprehensive operating system alone does not constitute the amount of control necessary to support vicarious liability claims like those raised by Ms. Patterson.
With respect to personnel issues, the Court found that Domino’s franchisees are owner-operators who hire and train the people who work for them, and who oversee the performance of those employees every day. In fact, in this Court’s view, a franchisor only becomes potentially liable for the actions of the franchisee’s employees if it retains or assumes a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the franchisee workplace. Moreover, in reviewing the evidence, the Court found that Domino’s had no contractual authority to manage the behavior of employees and, in fact, that it did not have any such actual authority either. Domino’s was not involved in the application, review or hiring processes of its franchisees. The franchisee was also solely responsible for training employees on how to treat each other at work and how to avoid sexual harassment.
So, a win for franchising? In the immediate term, yes. But I see significant potential long-term issues with the Supreme Court’s opinion. First, the Court essentially authored a roadmap for lawyers looking for ways to sue franchise systems on grounds of vicarious liability. Franchisors should take a hard look at their systems, training programs and operating manuals–particularly if they are operating in California–to absolutely ensure that they do not control the manner and means where agency could be an issue. Second, training of regional representatives, area leaders, and the like should emphasize that business areas left to the franchisee’s control must be left to the franchisee’s control. While the majority opinion accepted the testimony of the franchisee that he saw no implication in the “get rid of this guy” statement, the Court of Appeals and especially the dissenters on the Supreme Court seized on this comment. Unless it is truly a branding matter, it is best that the franchisor’s representative stay out of the fray.
And that brings me to the third and most troubling issue. The dissenters, who would have found vicarious liability, pointed to the fact that the Domino’s area leader once told the franchisee in this case to have a manager stop using Domino’s-branded bags to deliver a competitor’s food as further evidence of Domino’s control over personnel decisions. Huh? That’s right: what seems like a clear branding matter to a franchise professional is a personnel issue to three members of the California Supreme Court. Now, let me add that the Supreme Court decision was 4 to 3. One person changes sides, and this is a completely different (and very troubling) decision.